Understanding Your Experience Rating Worksheet
Like many businesses, your company may be eligible for experience rating under your workers compensation policy. If your firm is subject to experience rating an experience modifier will appear on your policy.
An experience modifier is a numeric factor that is multiplied by your premium. The modifier may be less than, equal to, or greater than 1.0. A modifier that is less than 1.0 will result in a credit (premium reduction) while a modifier that is greater than 1.0 will result in a debit (premium increase).
Experience modifiers are calculated by a workers compensation rating organization. This should be the NCCI if your company conducts business in an NCCI state. Otherwise, your modifier will likely be calculated by your state's workers compensation rating bureau. No matter what organization issues your modifier, it should provide a worksheet that explains how your modifier was determined. The modifier is calculated based on a three-year history of your payroll and losses. This information is provided to the rating organization by your insurer.
While worksheets used in non-NCCI states may differ somewhat from the NCCI's, they typically contain the same types of information.
The top portion of the worksheet consists of an account summary. This section includes the following information:
- Risk Name Your company name
- Risk Identification Number A 9-digit number assigned to your company by the NCCI
- Rating Effective Date The date your modifier takes effect. This is usually the same as your anniversary rating date.
- Production Date The date your modifier was calculated
- State The state in which you operate if you do business in one state only. Will show "interstate" if you operate in multiple states.
The main worksheet is divided vertically into three sections, one for each year included in the experience rating period. Each section summarizes the premium and loss information for the year indicated. The data is arranged so that the oldest information is at the top. For instance, suppose that your 2015 modifier was calculated based on data from January 1, 2011, to January 1, 2014. The data for the period January 1, 2011, to January 1, 2012, will appear at the top. It will be followed by data for the following year (2012 to 2013).
Data for the most recent year (2013 to 2014) appears at the bottom.
For each of the three years, the worksheet lists the policy number and the policy effective dates. Also included is a 5-digit carrier code. This code is assigned by the NCCI. It identifies the insurer that issued the policy.
Class Codes, Payroll, and Expected Losses
The worksheet is arranged so that your classification codes, payroll, and expected loss data appear on the left side of the page. Claim information (addressed in Part Two of this article) appears on the right side.
The table below shows the type of information that appears in the first six columns of the worksheet. The first column (Code) indicates the classification codes assigned to your business. In this example, there are two class codes, 8810 (Clerical Office Workers) and 8742 (Outside Salespersons).
The second column lists the Expected Loss Rate (ELR). The ELR is a dollar amount calculated by actuaries. It is based on premium and loss data for all employers in your industry group. The ELR is the dollar amount that your insurer anticipates spending on losses per $100 of payroll. For example, if the ELR is .10, then your insurer expects to spend ten cents on losses for every $100 of your payroll.
Expected Primary Losses
Expected losses are calculated by multiplying the ELR times your payroll (divided by 100). In the above example, Expected Losses for code 8810 are calculated as follows:
.10 X 3,500,000/100 = 3500
Here's the calculation for code 8742:
.25 X 1,800,000/100 = 4500
Primary Versus Excess Losses
Only a portion of large losses you incur are used for experience rating. This is to prevent a single large loss from severely impacting your experience modifier. Most states have established a threshold (such as $15,000) that separates primary losses from excess losses. The amount of a loss up to the specified threshold is the primary loss. The remaining loss is the excess loss. Depending on the type of claim, all of the primary loss but only a portion of the excess loss may be used for experience rating.
To determine the primary portion of your expected losses, actuaries have developed a factor called the Discount Ratio (D-Ratio). Primary expected losses are calculated by multiplying the discount rate times your expected losses. When primary expected losses are subtracted from total expected losses, the result is the excess expected losses.
Here are the calculations of Expected Primary Losses for the two class codes shown above:
Code 8842: .38 X 3500 = 1330
Code 8742: .32 X 4500 = 1440
Your experience modifier is calculated by comparing your actual losses to your expected losses.
Claims and Actual Incurred Losses
The last five columns of the worksheet appear on the right side of the page. These columns contain data related to claims and actual incurred losses (meaning losses you have sustained). An example is provided below.
|Claims Data||I J||O F||Actual Incurred Losses||Actual Primary Losses|
Claims are listed by claim number under the Claims Data heading. In the above example, two claims are listed by number. However, small claims (those under $2000) may be lumped together. A group of claims is identified by the letters "NO." The letters are followed by a number that indicates how many claims are included in the group. In the above example, "NO6" means that six claims are grouped together. Small claims are combined only if they involve the same type of injury, such as medical-only.
Injury Code and Status
To the right of the Claims Data is a column with the heading IJ. "IJ" means injury code. This is a numeric code that designates the type of claim. For instance, "5" indicates a medical-only claim while "6" means a temporary disability claim (partial or total).
Adjacent to the injury code is a column with the heading OF. These letters designate the claim status as either "O" or "F." The letter "O" means the claim is still open while "F" means it is final (closed).
The table above contains data for eight claims. Six medical-only claims have been grouped together while the two temporary disability claims are listed separately. For the purposes of this example, the threshold for primary losses is $15,000.
Actual Incurred Losses
The last two columns on the far right side of the worksheet contain data regarding your incurred losses. These are workers compensation benefits (medical expenses and disability payments) your insurer has paid to injured workers on your behalf. Losses include reserves for claims that remain open. A reserve is an amount your insurer has set aside for a future payment.
Actual Incurred Losses means the losses you have sustained with regard to the claim (or group of claims) indicated. Actual Primary Losses represents the portion of your total losses that are considered primary losses. When Actual Primary Losses are subtracted from Actual Incurred Losses, the result is Actual Excess Losses. Only a portion of excess losses is used for experience rating.
Experience Rating Adjustment
In many states medical-only claims are subject to an Experience Rating Adjustment (ERA). When the ERA applies, only 30% of the claim amount is used for experience rating. The remaining 70% is ignored. The ERA applies to claims that generate medical expenses only. It does not apply to claims that result in disability payments.
The experience rating formula includes two factors created by actuaries. The first is called a weight factor. This factor determines how much of your actual excess losses are used to calculate your modifier. The weight factor is small for small firms and increases as your company grows. If your company is small and you incur a large loss, the weight factor will limit the impact of the loss on your experience modifier. The loss would have more impact on your modifier if your firm was larger.
The second factor is called the ballast. As its name suggests, the ballast has a stabilizing effect. Its intent is to keep your modifier from deviating too far (up or down) from unity (1.0).
The experience rating formula adjusts both your Actual Losses and your Expected Losses. Once both numbers have been adjusted, your Actual Losses are divided by your Expected Losses. The result is your experience modifier.
First, your Actual Losses are determined by calculating the sum of the following three items:
- Your Actual Primary Losses If the ERA applies in your state, then only 30% of your medical-only claims will be included in the formula.
- Stabilizing Value This value is determined by multiplying your Expected Excess Losses by (1 minus the weight factor) and then adding the ballast.
- Your Ratable Excess Losses This is the amount of Actual Excess Losses that are used for experience rating. It is calculated by multiplying the weight factor by your Actual Excess Losses.
Next, your Expected Losses are determined by calculating the sum of the following:
- Your Expected Primary Losses This number is provided by the rating organization.
- Stabilizing Value This value is calculated in the same manner as indicated above
- Your Ratable Excess Losses This is the amount of Expected Excess Losses used for experience rating. It is calculated by multiplying the weight factor by your Expected Excess Losses.
Finally, your Actual Losses are divided by your Expected Losses. For example, suppose that your actual losses (based on the formula) were $45,000 and expected losses were $50,000. Your experience modifier would be $45,000 / $50,000 or .90.